The keys to patent licensing mediation for success

The keys to patent licensing mediation for success

In a recent dispute in India, LG Electronics sued Vivo over five of its standard essential patents related to 4G and 5G technologies. The Korean electronics giant had initially sought to resolve the dispute through mediation but eventually filed the lawsuit following 50 unsuccessful hearings. Under India’s Commercial Courts Act 2018, companies are required to seek an “amicable” resolution to their dispute before launching litigation, but the failed mediation in LG’s case raises the question of whether this mechanism really works for patent disputes.

Earlier this year, Justice Satish Chandra Sharma was quoted saying during an annual conference in Delhi that the “scope of mediation is expanding” and even the most “complex of matters are falling within its domain”, but “the success rate is low”.

There are reasons why the success rate is low, Paul Lin, founder of Eagle Forest consultancy and Xiaomi’s former IP head, wrote on LinkedIn. And, according to Lin, it goes beyond having both sides of the table being willing. “There are ways to motivate parties who are less willing or less engaging and once the less engaging party sees mediation is the best approach, motivation becomes natural,” he says.

Lin sat down with IAM to discuss the Indian mediation prerequisite and the key components of effective mediation in high-stake patent licensing deals.

For a deal to succeed, both the licensor and the licensee must show some willingness, Lin notes. And there is a difference between being willing and actually engaging, as the former could just be passive. “That ultimately determines whether a mediation will be successful or not – I’ve never seen a deal get done with a passive party,” he says.

Making parties go through the process of seeking an “amicable” resolution can be effective in the IP space, but such mechanisms work better for licensors and licensees who will renew their licences in the future, Lin says. “[In such scenarios], there are more business considerations in the negotiation and both parties want to maintain the long-term relationship.”

However, mediation won’t be effective when a licensor is “only interested in getting maximum money out of a deal and doesn’t care about the relationship with the licensee, nor any needs that the licensee has expressed”, Lin says. Because of the nature of IP negotiations, this will often lead to litigation.

However, Lin emphasises that the mediator is responsible for facilitating the negotiation, identifying gaps, exploring creative solutions and managing emotions. And, he adds, there are ways to motivate parties who are less willing or less engaging. “One of the important things a mediator can do is present alternatives to such parties and lay out the different scenarios – but it is easier said than done,” he says. And, this goes back to my point of having a “qualified” mediator, he adds.

The key components of an effective mediator

Mediation is an effective and low-cost venue to resolve patent disputes that are in small amounts or have a low impact on business. But, for licensing deals in the high eight or nine figures that have a high impact on business, the experience and skills of a mediator are “key”, Lin contends.

He underlines those five key aspects. Firstly, good negotiators should be creative, Lin says. “Secondly, and preferably, they have also done similar licences on the same scale themselves before.”

Next, a suitable mediator is someone with deep knowledge of the industry that is at the centre of the licence being constructed. “Someone in the pharmaceutical industry cannot understand cellular licenses, for example – and vice versa,” he says. In pharma, one pill may have three key patents – without which you cannot make the product, or you could make it and then be shut down immediately. Meanwhile, cell phones could have up to half a million patents. “Therefore, strategies between the industries are going to be very different – and the same applies to mediation,” Lin says.

A mediator must also have a “very strong business mind” as they must be able to understand how the C-suite makes decisions over such licences. A lot of the time, the representative of the unwilling party is tasked with going back to their C-suite and persuading them why they should take the deal. “But if a mediator fails to change the less willing party’s desire to reach a deal, the mediation will for sure fail,” Lin says. The mediator must therefore be able to help both sides come up with a particular narrative, or in other words: “how they will walk away declaring they have come up with a reasonable deal”. The representative must have the right message to bring back to management and it cannot just be “the mediator said this is right so this is what we must pay”, he emphasises, adding: “That narrative is where I see the inexperienced mediators fail – if you cannot come up with a narrative then you cannot really influence the people on either side of the table.”

This follows through to the next factor, which is that mediators must be good negotiators who understand how to help each side of the table see the gaps and the roadblocks to the negotiation.

“You would be surprised to see how often parties engaged in negotiation don’t know exactly what they want to achieve,” Lin says. But if parties don’t know what they want, they cannot see the real gaps.

“Parties will often say they want the right price, the right terms and the best overall deal among their competitors. But when you push them and ask: ‘Knowing that you will not get everything you want, what is the most important thing you want to achieve in this licensing deal?’ They actually don’t know the answer,” he says. Negotiation is “the art of compromise”, so if a mediator cannot help parties understand what they must compromise, they will fail, he adds.

The patent pool dilemma

In response to Lin’s post on LinkedIn, Avvika AB’s founding and managing director Eric Stasik wrote: “Mediation is not going to bridge the gap when every licensee expects to pay less than the one before. Such a deal-maker might be able to broker one or two deals, but won't be able to consistently make deals where each deal has to be a better deal than the last.”

Stasik proposed patent pools as the ultimate solution; where there is “no room for negotiation and everyone pays the same price without any ‘deal-making’”. He noted that having a pool in the handset space would lower transaction costs, make costs and revenues predictable and remove any sort of price differentiation based on size or circumstance. “This is working for automobiles [so] why shouldn't it also work for plain old smartphones?”

“I agree in principle,” says Lin, “but this only applies when you have very well-run pools – such as in the AAC market.”

In fact, he believes a pool’s efficiency depends from industry to industry. In the AAC market, Via Licensing’s pool has over 1,000 licences and the prices are very transparent. But in the cellphone market, where there is yet to be significant buy-in, pools cannot be the ultimate solution, he says. In the 4G space, for example, Via Licensing’s pool, launched in 2012 was only able to attract 11.5% of the active self-declared 2G-4G SEP grant family landscape over its 10 year-life, while Sisvel’s rival only attracted 1.1%. While Sisvel’s 5G patent pool, launched last year, has already been more successful, it has still only attracted 1.2% of the market.

Lin concludes: “If the pool price is too high, licensees will opt for bilateral licenses to clear risks because it is more economically sensible to do so. Meanwhile, if a pool doesn’t have a sufficient amount of SEPs, a licensee must deal with too many licensors outside of the pool after signing a pool licence. This then defeats the notion that a ‘pool is a one-stop shop’. Pools can only be a great licensing platform if they meet certain criteria.”

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